Author Topic: DEBT EMERGANCY  (Read 4980 times)

S/S/T

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DEBT EMERGANCY
« on: October 14, 2013, 09:51:56 AM »
Iím currently in a debt emergency and was putting all extra money on the debt with the highest interest rate when I came up with what I thought was a good plan.  Here are the numbers
1   personal loan at   6.00% with a balance of 18,944.10
2   1st credit card at 13.24% with a balance of 11,731.02
3   2nd credit card @11.24% with a balance of  1,193.42
4   3rd credit card at 19.24% with a balance of  1,444.32
5   School loan at 3.40%  with  a balance of      3,810.22
6   401K loan at  5.00% with a balance of         4,956.54
NEW PLAN
Pay off the 401K loan as fast as possible while making minimum payments on all other debt. Once the 401K loan is paid off, borrow enough to pay off all other debt from my new 401K loan.  The new interest rate for a 401K loan is 4.25%.  I know the school loan has a lower interest rate but that is interest Iím paying to someone else. I am paying myself the interest on the 401K loan.  As in Iím the lender and the borrower and the interest goes straight into my account.
I appreciate any input on this idea.
Thanks,
S/S/T

TrulyStashin

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Re: DEBT EMERGANCY
« Reply #1 on: October 14, 2013, 10:01:34 AM »
Is there any risk of you being laid off/ losing your job prior to paying off the second 401k loan?  That's the biggest risk that I see.

mlipps

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Re: DEBT EMERGANCY
« Reply #2 on: October 14, 2013, 10:02:51 AM »
I see lots of potential problems.

1. Why did you take out the first 401k loan?

2. What are you doing to keep from taking on additional debt in the future if you pay off those cards?

3. Your 401k loan is typically due immediately on termination of employment with the company. That's a massive amount of debt to have dependent on your continued employment.

4. What fees are there in conjunction with taking out a 401k loan?

Frankies Girl

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Re: DEBT EMERGANCY
« Reply #3 on: October 14, 2013, 10:03:44 AM »
You should hit the highest interest rates hardest and pay minimums to the others... the less money you pay towards interest, the more you have to pay off the debt. Do not take out any more loans on the 401K - that is not a good use of the funds.

I'd pay in this order:

3rd credit card at 19.24% with a balance of  1,444.32
2nd credit card @11.24% with a balance of  1,193.42
1st credit card at 13.24% with a balance of 11,731.02
personal loan at   6.00% with a balance of 18,944.10
School loan at 3.40%  with  a balance of      3,810.22
401K loan at  5.00% with a balance of         4,956.54

If you pay off the 401K first, you are losing a substantial amount of money towards interest on the insanely high rate card debts. That's throwing extra money away that you obviously need.

And I do hope you've cut up, torched or otherwise destroyed those credit cards. And you need to be putting at least a tiny bit of money into an emergency fund - try $50 a paycheck into savings if you can swing it, and put everything else you've got at those debts.
« Last Edit: October 14, 2013, 10:28:33 AM by Frankies Girl »

nawhite

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Re: DEBT EMERGANCY
« Reply #4 on: October 14, 2013, 10:09:46 AM »
I see the math on this being a "not-worst-idea-in-the-world" idea, but 2 things to keep in mind.

1. School loans generally have awesome benefits (tax write off of interest, multiple repayment options, deferment/forbearance, etc). Those combined with the fact that the interest is less than the 401k loan makes me lean towards leaving it alone.

2. If you lose your job, any 401k loans become instantly due! If you are putting 2k per month towards that loan, it will take you around 3-5 years to pay that loan off. If there is any chance at all that you will lose your job within that time, then you will be ROYALLY screwed. You would be forced to take a disbursement on your 401k which will cost you 10% in fees plus your marginal tax rate (15-28% most likely). If that happened you would have been far better off with just paying the high interest rate loans down as fast as possible.

JessieImproved

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Re: DEBT EMERGANCY
« Reply #5 on: October 14, 2013, 10:12:09 AM »
Pay off the highest interest loans first.  And I'm not sure if you've done it yet, but you might want to start a journal on this forum, because your pants are seriously on fire,  and these people can help.

Will

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Re: DEBT EMERGANCY
« Reply #6 on: October 14, 2013, 10:16:21 AM »
You really need to go to http://www.whatsthecost.com/snowball.aspx and enter all your information in there.  You have the chance to see what different scenarios cost you interest/time-wise.

ioseftavi

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Re: DEBT EMERGANCY
« Reply #7 on: October 14, 2013, 10:24:30 AM »
I’m currently in a debt emergency and was putting all extra money on the debt with the highest interest rate when I came up with what I thought was a good plan.  Here are the numbers
1   personal loan at   6.00% with a balance of 18,944.10
2   1st credit card at 13.24% with a balance of 11,731.02
3   2nd credit card @11.24% with a balance of  1,193.42
4   3rd credit card at 19.24% with a balance of  1,444.32
5   School loan at 3.40%  with  a balance of      3,810.22
6   401K loan at  5.00% with a balance of         4,956.54
NEW PLAN
Pay off the 401K loan as fast as possible while making minimum payments on all other debt. Once the 401K loan is paid off, borrow enough to pay off all other debt from my new 401K loan.  The new interest rate for a 401K loan is 4.25%.  I know the school loan has a lower interest rate but that is interest I’m paying to someone else. I am paying myself the interest on the 401K loan.  As in I’m the lender and the borrower and the interest goes straight into my account.
I appreciate any input on this idea.
Thanks,
S/S/T

Emphasis added on the part where I suppose you think you're beating the system by loaning yourself money.

My vote is a resounding "No don't do this, this is a bad idea."  You have over $42,000 of debt at a weighted average interest rate of 8.27%.  That's $3,473 per year that you need to pay - or about $300 per month - that you're paying just on interest. 

The "I'm the lender and the borrower and the interest goes straight to my account" is nonsense, but let's run some numbers:

What you are talking about is essentially a refinancing of your debt.  You will suck an additional $37,000 out of your 401(k) at a 5% interest rate and use it to repay all your other debts.  $42,079 in debt at 5% is a yearly cost of $2,104. 

Comparing your current interest rate burden vs. your potential interest rate burden, you're talking about raiding your retirement fund and taking a huge risk (that you might get laid off) to save $1,369 in interest per year. 

Stop.  Stop, stop, stop.  Do not do this.  You can realize a huge part of that $1,369 in savings by snowballing your debt aggressively, and you won't take the insane increase in risk that comes along with raiding your 401(k).

Pay off your debts, highest interest rate first.  Fix whatever spending habits or commitments caused you to take on all this debt in the first place.  Don't try to 'outsmart the system' - reduce your spending, up your income, and snowball your loans.

EDIT: NAwhite's post outlines why you should keep your student loans, and the risks on a 401k loan.  Add his advice to mine.
« Last Edit: October 14, 2013, 10:27:26 AM by ioseftavi »

Grindin' Away

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Re: DEBT EMERGANCY
« Reply #8 on: October 14, 2013, 10:48:18 AM »

First of all, congrats on identifying the probleming, and choosing to do something about it.

I would suggest NOT taking out another 401k loan.  The long term Net Worth implications of doing so will outweigh the instant gratification you're looking for.  Plus as mentioned earlier, there's a huge risk if you are laid off.

The best place to really start doing damage is your spending.  Detail out all of your spending like you see on many of the other posts/journals.  It quickly becomes obvious where you can cut costs, and start applying any excess income towards your highest rate debt, and start moving down the line.  To me, it looks like you are paying close to $300 a month in interest alone.  Knock out that ridiculous predatory CC at 19.24%, and you already have $23.15 more a month working for you without changing anything, and your snowball continues.

I second the idea that you should make an entry in the journal section with a detailed listing of your income and expenses.  Your situation has the potential to be a great success story, and could be a great inspiration for others who think there's nothing they can do.

S/S/T

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Re: DEBT EMERGANCY
« Reply #9 on: October 14, 2013, 04:22:45 PM »
Thanks for the input.
TrulyStashin - no there isn't much chance of me being laid off, but that's what everyone thinks, right?

mlipps - the 401K loan I have now was for a purchase of a house
             What Iíve done to prevent additional debt was to give in to my ex-wifeís wishes. (Divorce)
             There is a $25 processing fee for the loan

I hadnít thought of the loan becoming due if I lost my job.  I was hesitant because my 401K is currently kicking some ass.  Close to 11% kind of ass.  Iím just frustrated because all my money is currently going to my debt.  If I paid off my debt with the 401K my minimum payments would be in the seven hundred range.  I could start contributing again and take advantage of the 25% employer match.



MsSindy

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Re: DEBT EMERGANCY
« Reply #10 on: October 15, 2013, 01:04:08 PM »
In addition to all the reasons others listed for not taking out another 401k loan, is that you typically have a waiting period of 6 mo or 1 year after paying off a loan to take out another - at least that's how it is at my company.  Also, if your 401k is making 11%, you'd be a fool to take a loan against it.

I know it's tough when you see "your money" sitting there and you want to use it, but in the long run, you'll be sooooo glad that you didn't touch it and just let it accumulate.  I raided mine early in life and it is the single most thing I regret, well that, and one night in Tijuana....but that's for another post  ;)

Stay focused on the right thing - which is to pay off your debt as soon as possible like your hair's on fire!  Get creative on cutting your budget and uping your income - it will only be temporary pain until you're back on even keel.

Forcus

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Re: DEBT EMERGANCY
« Reply #11 on: October 15, 2013, 01:40:46 PM »
One thing you may not have thought of - I'm not sure your 401k plan will allow you to pay off a loan quicker unless you make a complete lump sum payment. At least, that is the deal with my company's 401k plan. This might actually be a good thing for you for the reasons every one else stated above.

Bank

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Re: DEBT EMERGANCY
« Reply #12 on: October 15, 2013, 02:23:26 PM »

If you pay off the 401K first, you are losing a substantial amount of money towards interest on the insanely high rate card debts. That's throwing extra money away that you obviously need.


This.  High interest debt always goes first.

Edit:  High interest debt should ALMOST always go first.

jay

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Re: DEBT EMERGANCY
« Reply #13 on: October 15, 2013, 02:44:33 PM »
4   3rd credit card at 19.24% with a balance of  1,444.32
3   2nd credit card @11.24% with a balance of  1,193.42
6   401K loan at  5.00% with a balance of         4,956.54
2   1st credit card at 13.24% with a balance of 11,731.02
1   personal loan at   6.00% with a balance of 18,944.10
5   School loan at 3.40%  with  a balance of      3,810.22

I'd pay the debts off in this order.  I agree that paying off the high interest loans first is mathematically correct and normally the right plan, but it's important to knock out the smaller, high interest rate credit cards first.  That provides psychological motivation and also gets the snowball rolling.  You then have less payments and can start to focus. 

The 401k loan should be next, since as everyone agreed it's an emergency waiting to happen.

okashira

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Re: DEBT EMERGANCY
« Reply #14 on: October 15, 2013, 03:39:15 PM »
My first post because of this thread.

I don't think right answer has been posted yet. Here it is.

1.) Immediately stop spending. No more cars, houses, restaurants, gas, whatever.
2.) Get in contact with your 401k admin. Ask what it takes to do withdrawals with 10% penalty. If you can do this reguarly and in in a timely matter, move on to 3.)
3.) Set your 401K contribution to full 25% employer match. You MUST take this match because that's an immediate guaranteed 100% return on your money.
4.) Start doing monthly withdrawals from your 401k, yes, taking the 10% penalty, to aid in paying your bills and debts.
  • withdrawal as much as 160% of your contribution. It's ok, because you're using this money to LIVE and to pay high interest debts. This is better then the investments in your 401k; I am sure.
5.) Once you have your 3 credit cards payed off, stop your 401k withdrawals, keep the 25% contribution and whittle down your 401k and personal loans from there using net pay only.
6.) After you have some balance in your 401K, you can start to worry about your investment choices.


EDIT: to be clear, yes I am advocating 401K withdrawals, in addition to NOT paying back that 401k loan. Why? it's your lowest interest debt. And that interest is payed back to you, anyway.
Worst thing that will happen is you lose your job and they just take the money from your 401k to cover the debt.
Best thing that could happen is you keep your job, enjoy a 25% raise (minus 10% penalty) that I have advocated and you will come out way ahead.

Don't forget that it's most certaitnly not always true that the 401k will become due if you're fired. It depends on your employer.
« Last Edit: October 15, 2013, 03:51:44 PM by okashira »